How to Become Amazing at Day Trading

There is a lot to know when you start day trading. This list of 20 tips will help you make sure that you are starting off on the right foot, have a plan in place and know how to manage your risk.

01

Create a Trading Plan

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Before a single real dollar is put at risk, a trader needs to have some idea of how they will make a profit. The steps that will be taken to attain those potential profits are laid out in a trading plan. A trading plan is a personally-written document that states what we will trade and when, how we will enter a trade and why, when and how we will get out of winning and losing trades, and how we will determine our position size. These are the basics. Additional rules can be added over time as needed.

02

Prove Your Methods Before You Trade Real Money

With a trading plan in place, the next task is to test that plan in a demo account (no real money at risk) to see how it performs. If the plan doesn't work in a demo account, it won't work in the real world. Revise the trading plan, then go back to the demo account to test out the changes. This process continues until a profit has been made for several months in a row. At that point, it is likely the trading plan is a good one. The following tips will help you get your trading plan to that point.

03

Create a Day Trading Routine to Avoid Mistakes

Create a routine for the trading day. A routine includes getting up at the same time each day, starting to trade at the same time each day and checking for scheduled economic data releases that may affect the market.

Quit trading at the same time each day, and then have a routine for reviewing all trades taken. In terms of each trade, have a checklist you run through to make sure that each trade aligns with your trading plan.

04

Don't Hold Positions During High Impact News Announcements

High impact news releases are unpredictable in both how far they may push the price, and in what direction. High impact news events include company earnings announcements and scheduled economic data releases. Avoid holding day trading positions during such events. Instead, wait till after the news is released. Then, use day trading strategies to capitalize on the volatility that ensues.

05

Review Trades Weekly and Monthly

A review is critical to long-term success. Without review sessions, a trader can't see the overall picture of what they are doing well and what they are doing poorly.

Each day, take a screenshot of your chart with all your trades marked on it. At the end of the week, review the charts for the prior week and note deviations from the trading plan. Note any areas of the trading plan that could be improved.

Write down a plan for how to implement these improvements. At the end of each month, review your weekly plans and note whether you have made progress on these or not.

06

Create a Mental Checklist That Each Trade Must Satisfy

When watching a price chart it is easy to get distracted from the trading plan. Prepare a checklist to run through before every trade. The checklist makes sure that the trade meets all the specifications laid out in the trading plan. It only takes a second to mentally go over the checklist and can save a trader from many bad trades.

07

Have a Plan for When Your Weaknesses Pop Up

Each trader has weaknesses and strengths. Over time, traders will notice their weaknesses, such as not taking a loss when they should (and letting it get bigger) or taking trades that don't align with the trading plan (and thus, these trades are based on an unproven strategy). Such weaknesses can cause big losses in a hurry. Have a personal plan for what you will do when you notice yourself making one of these mistakes.

The plan may include closing the trade immediately, followed by a mandatory 10-minute trading break. Or, it may even include hiring or asking a friend to work with you on the issue until the weakness is eliminated.

08

Utilize a Stop Loss Order

A stop loss order gets a trader out of a trade if the price of an asset doesn't move in the expected direction. It is the point where the trader must admit they are wrong. It is impossible to predict what the market will do from moment to moment with great accuracy, therefore losing trades do occur. The stop-loss protects the trader for bigger losses during those times. Use a stop loss.

09

Risk Less Than 1% of Capital Per Trade

Based on where the stop loss is placed, it should limit the damage caused by a losing trade to less than one percent of the trader's account balance.

One percent of the account, in dollars, is the account risk. The difference between the trade entry price and stop loss price is the trade risk. Trade risk, multiplied by the position size, should be equal to or less than the acceptable account risk (one percent of the account).

10

Stop Losses Are Based on Today's Market Conditions

Place stop loss orders based on a proven strategy, but also base them on the volatility being seen today. If a stock is much more volatile today than it has been in the past, the stop loss needs to reflect that. Expand the stop loss to give the trade a bit more room to move, and reduce the position size accordingly. On very quiet days, the stop loss can be moved closer to the entry point.

11

Profit Objectives Are Based on Today's Market Conditions

Just as stop losses are adjusted to accommodate for changes in volatility, so are targets. Targets are orders that get us out of a trade when in a profitable position. During volatile time targets can typically be expanded (moved further away from the entry point), and should be, as this offsets the larger stop loss also used during such times. When there is little volatility targets can be reduced, as stop losses are also generally reduced during quiet times.

12

Potential Reward Should Outweigh Risk on Every Trade

Overall profit is determined by what percentage of our trades we win, and our average winning amount versus the average loss. Day traders should strive to have average winning trades that are bigger than their average losing trade. That means only taking trades where the target has a reasonable chance of being hit and can be placed at a further distance from the entry point than the stop loss. For example, if the stop loss is $0.10 away from the entry, then the target is $0.20 away. In this case, the potential reward is twice the risk.

13

Implement a Daily Stop Loss

Just as a day trader should control risk on each trade with a stop loss, a trader should also cap how much they are willing to lose in a single day. Bad trading days happen. We can't let those days ruin our entire month or account. Limit single day losses to an amount you can reasonably make back on a profitable day.

New traders, who don't know how much they can make on a profitable day, should limit single day losses to 3% (or less) of their account balance.

14

Use Limit Orders When Entering Positions

A limit order will only execute at the price specified, or better. When entering a trade, we use limit orders to control at what price we will enter the trade. If you use market orders we may end up with a different entry price than expected, which may throw off our whole plan for that trade.

16

Focus on One Market at a Time

Some new traders feel a compulsion to trade anything that is moving. These traders typically end up mastering nothing. Focus on one market, and even one specific instrument (such as one stock, forex pair or ETF), and become a master in it. Becoming a master in one thing will produce far more consistent results than being poor at trading a bunch of different things.

17

Price Action Is More Important Than Indicators.

How an asset's price is moving is more important than what an indicator is saying. Most technical indicators look at historical prices, and therefore can't tell you what is happening right now (while the actual price can). That isn't to say technical indicators can't be used, but they should be used sparingly.

18

Don't Let One Mistake Turn Into More

Trading mistakes happen. They are annoying, usually cost some money, but won't prevent you from being a profitable trader if you put a lid on the mistake right away. Don't let it fester, bother you or cause you to make more mistakes. Accept that mistakes happen and then move your focus back to implementing your strategy. Our goal should always be to trade another day. If we let a mistake get us angry and that causes more mistakes, we could lose a lot of money in a hurry.

19

Avoid Distractions, Like Newscasts or Analyst's Opinions

A day trader's job is it implement a strategy that works, over and over again, as conditions allow. Outside input won't aid in this endeavor, but may actually cause us to deviate from a profitable strategy we are already using. If you have a strategy that works, there is little reason to listen to other's opinions on the market, except for when engaging in polite conversation.

20

Trust Yourself, Your Research and Your Practice

New traders often get stuck in an endless search for more knowledge, reading one book after another, watching video after video and jumping from this guru to that guru. Realize that all this extra knowledge won't necessarily improve results. You only need to implement one strategy effectively to make a profit. Once you are doing that, trust yourself; after all, it is your money.

Day Trading Tips - The Final Word

These tips will help you get on, and stay on, the correct path. But, they are not substitutes for practicing a strategy or building and testing your own trading plan. Ultimately, your day trading success or failure will come down to the amount of work you put into it.